In April, the federal government decided to introduce halal mortgages through the 2024 federal budget as a way to increase homeownership across the country. Today, let’s talk about whether this is an effective solution to the housing crisis.&nbsp;What is a halal mortgage?&nbsp;It is a mortgage that complies with the principles and teachings of the Islamic faith. They are designed to adhere to the requirements of Sharia Law which forbids the payment or receipt of interest. While this plan allows Muslim Canadians to seek homeownership in accordance with the rules of Islam, non-Muslim Canadians can also opt in and access this product. As noted above, in Islam it is against the rules for someone to take or accept interest. However, similarly, many other Canadians fall into this category as charging excessively for interest is against the rules in Christianity and Judaism; the Abrahamic faiths have an absolute prohibition on the principle of usury.&nbsp;Riba is the Arabic word for “to increase” or “to exceed” and covers the idea of charging excessively for lending money as it is considered exploitative. It is founded in a view of unjust enrichment: the borrower can fall into debt as the lender continues to build profits. It is for this reason that traditional mortgage or loan styles are not consistent with Islamic practices and would be haram.&nbsp;The main objectives of traditional mortgages and halal mortgages are the same. Both parties, the lender and the lendee, have a stake in ownership of the land. Halal mortgages do not mean that there is no payment to the lender. Rather than charging nothing in a halal mortgage, the loophole to interest is to charge a profit rate which is usually equal to or slightly greater than mortgage rates of a traditional mortgage. The lender is still able to profit in a halal mortgage but there are limits placed on the profiting. In truly Islamic mortgage, the goal is for both parties to share profits and losses.&nbsp;&nbsp;Guidance Residential points out that there are three types of riba-free (interest free) mortgages that are typically used:&nbsp;&nbsp;<ul><li>Musharakah</li><li>Ijara</li><li>Murabaha</li></ul>&nbsp;Musharakah is co-ownership between lender and borrower, where over time the borrower buys out the lender’s ownership of the property and also pays a fee to use the property.&nbsp;&nbsp;Ijara is when lender buys the property and the borrower makes rent-like payments that contribute to the borrower’s ownership of the property. In ijara, eventually the entire house price will be paid off and once the final payment is complete, ownership may be transferred from the lender to the borrower.&nbsp;&nbsp;Finally, there is murabaha, which is described as “a resale with a deferred fee.” This is where a profit charge is paid in addition to an initial deposit and gradual repayments to the lender.&nbsp;&nbsp;The last two, ijara and murabaha, are less favored by Islamic scholars than Musharakah. In ijara, it is less equitable in that the relationship does not resemble that of two owners but rather a landlord and a tenant relationship. In murabaha, this schedule very closely resembles the relationship and characteristics of debt and the profit charge closely resembles the Christian West’s idea of interest. As a result, the musharakah plan is the one most commonly favored by Islamic scholars as it most accurately sums up each of the ethical principles that support halal mortgages.&nbsp;&nbsp;Are Halal mortgages cheaper than conventional mortgages?&nbsp;&nbsp;The short answer is no. Islamic mortgages are more expensive, currently costing the borrower about 4.0% more on average than conventional mortgages due to the unique structure they follow to align with Sharia law.&nbsp;&nbsp;Cost plus modelInstead of charging interest, as in the typical lending model, Islamic finance mortgages operate on a cost-plus model, a lease-to-own agreement, or a partnership model. These structures often require more extensive administrative work, leading to higher costs.&nbsp;Risk SharingAdditionally, due to the risk-sharing principle inherent in Islamic finance, the risk assumed by the lender could be higher, potentially leading to higher pricing.&nbsp;Market sizeLastly, Islamic banking is a niche market with fewer competitors, which might not drive prices down as aggressively as in conventional banking. It’s essential to understand that while the initial costs might appear higher, the overall benefits — including complete transparency and no penalties for late payments — offer significant value to many customers.&nbsp;&nbsp;Depending on the structure, lenders may also run up against an inability to foreclose due to Islamic principles, increasing risks in recouping funds if the borrower can't payThese factors add up to a less affordable product compared to standard mortgages.&nbsp;Despite the lack of interest rates, these structures don't necessarily mean that payments won't change over the life of the loan. Contracts may allow the lender to adjust fees or rents to general market conditions during or upon term renewal. At the very least, however, Halal mortgages may be able to escape the volatility of a variable-interest-rate mortgage, whose payments float along with changes in bank prime rates. Instead, they'll more closely resemble the fixed payments of a fixed-rate mortgage for predictable budgeting.&nbsp;The lack of guiding regulations means that Halal mortgages aren't currently eligible for default insurance through one of Canada's three providers), so lenders require at least a 20% down payment (called a conventional mortgage) — vs. a minimum of 5% down, depending on the home's price. A larger down payment may not be as easy to gather under Sharia law, as using interest-gaining products (such as an RRSP) towards a down payment is also prohibited.&nbsp;&nbsp;Where can you currently get a Halal mortgage?Some lenders in Canada who offer this product (the province you reside in may affect access):&nbsp;<ul><li>Eqraz (lends in all provinces except QB and Atlantic)</li><li>Manzil (currently lends in AB and ON)</li><li>Canadian Halal Financial Corporation</li></ul>&nbsp;Eqraz and Manzil are both members of the Accounting and Auditing Organization for Islamic Financial Institutions. The AAOIFI is an international not-for-profit organization located in Bahrain that regulates Islamic finance organizations and offerings to be Shariah-compliant.&nbsp;&nbsp;The Canadian Halal Financial Corporation is not a member of the AAOIFI, but it does adhere to the organization’s standards and has had its products deemed halal by experts in Sharia law.&nbsp;In addition to the three Canadian halal mortgage providers, there is also a US-based company called IjaraCDC that offers halal mortgages to Canadians.None of the Big 6 Canadian Banks offer halal mortgages, as halal mortgages aren't just about being compliant for the borrower. They usually also mean finding Halal-compliant funding. Big banks may need to solicit this funding source to offer these non-interest products.&nbsp;Qualification requirements for a halal mortgage in Canada&nbsp;The qualification requirements for halal mortgages in Canada will depend on the provider. They will likely review your income, credit history, and may require a down payment of at least 20%. Halal Financial Corporation, however, requires a minimum down payment of 25%.&nbsp;&nbsp;Halal mortgage challenges in Canada&nbsp;The regulatory environment and tax laws in Canada are secular making it more difficult to issue Islamic mortgages compared to conventional mortgages. This is because Islamic mortgages are structured according to Shariah principles, which require a different approach to risk management and asset management.&nbsp;There is a lack of standardization in the halal mortgage market, which makes it difficult for consumers to compare products and services. This lack of standardization also makes it challenging for lenders to develop Shariah-compliant products.&nbsp;Due to unique complexities, it is difficult to know which mortgages are truly compliant with both Sharia and Canadian laws.&nbsp;&nbsp;According to the Eqraz website, Musharaka mortgages may be non-Shariah-compliant with the use of interest-bearing secondary contracts. Eqraz also suggests that both Musharaka and Ijara mortgages are incompatible in Canada for a variety of reasons, including double capital gains and land-transfer taxation, GST/HST-taxable maintenance responsibilities, and, in the case of diminishing Musharaka mortgages, complications regarding who takes on the downside risk despite co-ownership of the property.&nbsp;The goal of the federal government introducing halal mortgages will not assistance in softening the housing crisis but rather open up options for different communities across Canada by diversify financing alternatives for housing. A federally supported halal mortgage plan will allow Muslim Canadians to purchase a home according to the rules of their faith and it adds a code of ethics and morality to the lending practices.&nbsp;&nbsp;It’s essential to carefully review the terms and conditions of a halal mortgage before signing any agreements. It’s also recommended to consult with a financial advisor or a Sharia-compliant financial expert to ensure that the mortgage meets your financial and spiritual needs.&nbsp;

Halal Mortgages:  The Federal Budget 2024

RIFO provides insights into the introduction of halal mortgages in Canada's 2024 federal budget, offering insight into Islamic finance principles and regulatory challenges 

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